Audit PROCESS

Chapter 3
By Quang Pham
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 Chapter 3 Learning
Objectives
1. Understand objectives and responsibilities for the
audit & Distinguish management’s responsibility for
the financial statements from the auditor’s
responsibility for verifying those statements.
2. Identify the benefits of a cycle approach to
segmenting the audit.
3. Describe why the auditor obtains assurance by
auditing transactions and ending balances, including
presentation and disclosure.
4. Link transaction-related audit objectives to
management assertions for classes of transactions.
5. Link balance-related and presentation and
disclosure-related audit objectives to management
assertions.
6. Understand four phases of audit process
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 Auditor’s
responsibilities
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 Financial statement
cycles
A common form of segmenting is called the cycle
approach, which divides classes of transactions and
account balances that are closely related into segments.

The cycles used in this text are listed below and detailed
in Figure 6-4.

Sales and collection cycle

Acquisition and payment cycle
Payroll and personnel cycle
Inventory and warehousing cycle
Capital acquisition and repayment cycle

A trial balance is illustrated in Figure 6-5, with accounts

categorized by cycle.

Cycles applied to the trial balance are illustrated in Table

6-2.
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 Financial statement cycles (cont.)
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 Setting audit objectives

The most efficient way to conduct audits is to obtain

some combination of assurance for each class of
transactions and for the ending balances in the related
accounts.

Link transaction-related audit

objectives to management
assertions for classes of
transactions.
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 Transaction-related audit objectives

General Transaction-Related Audit Objectives:

Occurrence—Recorded transactions exist.

Completeness—Existing transactions are
recorded.
Accuracy—Recorded transactions are stated at
the correct amounts.
Posting and Summarization—Recorded
transactions are properly included in the master files
and are correctly summarized.
Classification—Transactions included in the
client’s journals are properly classified.
Timing—Transactions are recorded on the correct
dates.

Specific Transaction-Related Audit Objectives—The

specific transaction-related objectives are tailored to the
specific class of transactions being audited

Relationship Among Management Assertions and

Transaction-Related Audit Objectives—For each
management assertion, there are general transaction-
related audit objectives as well as specific transaction-
related audit objectives.

Table 6-4 illustrates these relationships using sales

transactions.
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 Link balance-related and
presentation and disclosure-related
audit objectives to management
assertions

General Balance-Related Audit Objectives

Existence—Amounts included exist.

Completeness—Existing amounts are included.
Accuracy—Amounts included are stated at the
correct amounts.
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 Classification—Amounts included in the client’s
listing are properly classified.
Cutoff—Transactions near the balance sheet date
are recorded in the proper period.
Detail Tie-In—Details in the account balance agree
with related master file amounts, foot to the total in
the account balance, and agree with the total.
Realizable Value—Assets are included at the
amounts estimated to be realized.
Rights and Obligations—Assets are owned or
controlled by the entity, and liabilities are obligations
of the entity.

Specific Balance-Related Audit Objectives—The same

as for transaction-related audit objectives, each
balance-related audit objective should be tailored to the
account balance being audited.

Relationship Among Management Assertions and

Balance-Related Audit Objectives—These
relationships for Inventory are illustrated in Table 6-5.
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 Presentation and Disclosure-Related Audit
Objectives—These relationships for Notes
Payable are illustrated in Table 6-6
(selfstudy)
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 DISCUSSION QUESTION

6-30 Textbook 1

6-31 Textbook 1
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 How audit objectives are met?

Four phases of the audit process

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 Phase I: Plan and Design an Audit Approach
based on Risk Assessment Procedures

Two overriding considerations affect how an auditor approaches the

audit:

1.Sufficient appropriate evidence must be accumulated to meet the

auditor’s professional responsibility.

2.The cost of accumulating the evidence should be minimized.

The audit plan should result in an effective audit at a reasonable cost.

The auditor performs procedures to assess the risk

that material misstatements in the financial statements
may be present.

Risk assessment procedures include 3 parts:

1. Obtain an understanding of the entity and its

environment.
Understand the client’s business and related
environment, including knowledge of strategies and
processes
Study the client’s business model, perform analytical
procedures, and make comparisons to competitors.
Understand any unique accounting requirements of
the client’s industry.
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 Risk assessment procedures (cont)

2. Understand internal control and assess control risk.

The risk of misstatement in the financial statements

is reduced if the client has effective controls over
computer operations and transaction processing
The auditor identifies internal controls and evaluates
their effectiveness, a process called assessing
control risk.
If internal controls are considered effective, planned
assessed control risk can be reduced and the
amount of audit evidence to be accumulated can be
significantly less than when internal controls are not
adequate.
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 Risk assessment procedures (cont)

3. Assess risk of material misstatement.

The auditor uses the understanding of the client’s

industry and business strategies, as well as the
effectiveness of controls, to assess the risk of
misstatements in the financial statements.
This assessment will then impact the audit plan and
the nature, timing, and extent of audit procedures

Phase II: Perform Tests of Controls

and Substantive Tests of
Transactions.

Tests of controls allow the auditor to evaluate the

effectiveness of internal controls and determine whether
the controls can be relied upon to reduce planned
control risks.

Example: A client’s internal controls require computer

matching of all relevant terms on the customer sales
order, shipping document, and sales invoice before sales
invoices are transmitted to customers. The auditor might
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 invoices are transmitted to customers. The auditor might
test the effectiveness of this control by comparing a
sample of sales invoices to related shipping documents
and customer sales orders, or by performing tests of the
computerized controls related to this process

Substantive tests of transactions allow the auditor to

evaluate the client’s recording of transactions.

Example: the auditor might use computer software to

compare the unit selling price on duplicate sales
invoices with an electronic file of approved prices as a
test of the accuracy objective for sales transactions. Like
the test of control in the preceding paragraph, this test
satisfies the accuracy transaction-related audit objective
for sales.

Phase III: Perform Substantive

Analytical Procedures and Tests of
Details of Balances.

Analytical procedures consist of evaluations of

plausible relationships among financial and nonfinancial
data.

Example: to provide some assurance for the accuracy

objective for both sales transactions (transaction-related
audit objective) and accounts receivable (balance-
related audit objective), the auditor might examine sales
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 related audit objective), the auditor might examine sales
transactions in the sales journal for unusually large
amounts and also compare total monthly sales with prior
years. If a company is consistently using incorrect sales
prices or improperly recording sales, significant
differences are likely.

Tests of details of balances are specific procedures

intended to test for monetary misstatements in the
financial statements.

Example: To provide assurance for the existence

objective for accounts receivable (balance-related audit
objective) is direct, written communication with the
client’s customers to identify whether the receivable
exists
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 Phase IV: Complete the Audit and
Issue and Audit Report

After all procedures have been completed, the auditor

will reach an overall conclusion as to whether the
financial statements are fairly presented.

After the conclusion, the auditor must issue an audit

report that will accompany the client’s financial
statements.
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